Making the Case for Plug-in Electric Vehicles: Smart Shopping

This is the third post in a three-part series on PEVs. This one examines the reasons to consider purchasing a plug-in electric vehicle. Part 1[2]Part 2[3]

In our previous posts, I described some of the benefits to national security and the environment with the use of plug-in electric vehicles (PEVs). This final post takes a look at what is often the most important issue to Americans: their wallets. PEVs are not cost-competitive with conventional vehicles in most situations yet, but there are some considerations that could be compelling for consumers to consider this winter when the first PEVs hit the market.

The first two PEVs, the Chevrolet Volt [4] and the Nissan Leaf[5] will both be available later this year. General Motors recently announced[6] the pricing for the new Chevrolet Volt, the world’s first mass-produced plug-in hybrid electric vehicle (PHEV). The revolutionary vehicle has a manufacturer’s suggested retail price (MSRP) of $41,000 before tax rebates (e.g., $7,500 tax credit from the federal government); the company is also offering a $350 per month lease agreement with $2,500 due at signing. Nissan announced[7] pricing for the all-electric Leaf in May with an MSRP of $32,780 (also eligible for federal and other tax credits) and a lease price starting at $349 per month. With a low monthly payment, leasing provides a viable way to acquire these vehicles. For vehicle purchases, these upfront costs are daunting – $33,500 for the Volt and $25,280 for the Leaf after a federal tax credit – but the benefit of the PEVs are realized after the purchase in the form of lower operating costs. This is similar to the dilemma faced by energy efficiency proponents – how do you get consumers to pay upfront for something that will reward them in the long run? Or in the case of PEVs, will these vehicles even pay for themselves in the long run? Both questions are very difficult to answer right now since they depend on three complex factors: consumer behavior, the volatility of gasoline prices, and the reliability of new technology.

The actual operating cost of either a Volt or a Leaf is difficult to estimate since they are both brand new vehicles; but if they go the way of the Prius, they could prove to be very reliable with low overhead. According to the True Cost to Own® feature at Edmunds.com[8], the true cost of a vehicle is determined by vehicle depreciation, taxes and fees, fuel, maintenance, repairs, tax credit, financing, and insurance. For simplicity and certainty, I’ll focus on fuel and tax incentives, though it’s quite possible that PEVs will have much lower maintenance and repair costs since electric motors have fewer moving parts and therefore should be more reliable in the long run.

The figure below depicts the annual savings for using electricity to power your vehicle versus a 35 mile-per-gallon gasoline vehicle in the initial markets for the Chevy Volt. It is clear that using electricity as a fuel is a big money saver due to both the efficiency of electric motors and the low cost of electricity compared to gasoline in dollars per unit of energy throughout the country. If you managed to electrify all your miles and sock away your savings in a low risk mutual fund earning about 5% per year, on average you could save almost $2,000 if you lived in Washington D.C. or $5,000 if you lived in Michigan in 5 years. (Savings depend on the percentage of miles that are powered by electricity and electricity prices as the figure indicates) These savings will not pay for the additional cost of the vehicle, but may convince some folks on the margin that appreciate PEVs’ other benefits that I’ve mentioned previously.

Figure 3: Annual savings for electrifying 25, 50, 75, and 100 percent of vehicle miles traveled (VMT) in the Chevy Volt’s initial markets. The graph assumes 35 miles per gallon for a gasoline-powered vehicle and uses region-specific data including average VMT per person, average electricity rates for 2010 YTD, and average gasoline prices in July of 2010.

In Crossing the Chasm[12], Geoffrey Moore discusses the difficulty of getting mainstream consumers to adopt new technologies. While Mr. Moore talks mostly about technology in his book, the analogy of crossing a chasm from early adopter to mainstream acceptance is applicable to cars as well. When Toyota introduced the Prius in 2001, it took less than a decade for the new hybrid technology to gain mainstream acceptance, and it is currently Toyota’s fourth most popular vehicle[13]. For the first time since the Prius, there is a new vehicle technology whose manufacturers will look to gain similar acceptance from the market. In the short run, it is unlikely PEVs will sell to the masses since consumers are comfortable filling their tanks with gasoline, and the cost of these new vehicles is prohibitive in many cases. Also in the short run, early adopters, such as technophiles and environmentalists, will likely gobble up the small inventory of PEVs that will be available. However, judging by the manufacturing plans of vehicle suppliers[14], there will be a point – that could come very soon – when PEVs will need to cross that chasm from the early-adopters phase to the mainstream if they are to be a viable alternative to conventional vehicles. It is at this point where the benefits of PEVs including improved national security, a cleaner environment, and a lower operating cost could play a role in gaining mainstream acceptance.